Kroger Earnings: Softer Food Inflation and Increasing Promotional Activity Weigh on Financial Marks

No-moat Kroger delivered lackluster fiscal 2024 first-quarter results as we think competition among food retailers continues to show signs of intensifying. The firm delivered a 0.5% increase in identical-store sales, which was consistent with our expectations and below the 1.1% average annual growth in food-at-home inflation from February to May 2024. Meanwhile, its adjusted operating margin declined 40 basis points to 3.3% (below our 3.5% estimate), primarily because of increased price investments and higher wages. Kroger enjoyed a stark uptick in food prices over the previous four years that allowed its comparable-sales growth to average around 5% and prompted margin expansion from cost leverage (its fiscal 2023 adjusted operating margin of 3.3% was about 90 basis points ahead of 2019's level). Moving forward, we still forecast a return to low-single-digit top-line growth and expect the retailer to give back some of its recent margin gains in the coming years. With management reaffirming its full year guidance and our outlook still intact, we do not expect to alter our $55 fair value estimate materially.